Is insurance affordable? Insurance companies tend to believe that the insurance they offer is affordable considering the risk involved. Most consumers believe insurance is not affordable due to their financial situation. How can you determine if insurance is affordable?
How insurers decide affordability
In order to determine affordability, insurers must decide if someone or something can be insured reasonably at a fair cost. The insured and the insurer must be able to share the risk at an affordable price. The policy will not be purchased if the insurer is unable to provide it at a fair price.
To determine a fair price, an insurer must do extensive research on the risks involved in issuing insurance policies. This includes:
Insurance company, insured party and policy holders may be subject to potential costs
General environmental conditions
Particular location
Ratings and proximity to emergency services
General economy at the global, local, and national levels
Particular financial situation and credit scores for an individual or company
General and particular social environments, such as the crime rate or civil unrest
Workplace safety hazards and dangers
In force or pending laws, regulations, building codes
Rating of House/Building Infrastructure – This rating is often based on the age of the building and the construction materials.
Climate change and current climate conditions are both risks.
Age, gender, marital status and occupation of the person.
Health, general well-being and driving record of the person. Criminal history
Insurers consider many other factors when determining affordability. In other words, any loss or damage that could be caused by any risk, peril or hazard will be taken into account.
How consumers decide affordability
Insurers need to consider the cost of the policy, as well as the risk taken and the possible costs to other policyholders. A consumer doesn’t care about financial protection if something happens to something that they treasure sentimentally or monetarily. Consumers will do their own risk assessment based on the likely outcome of the item and personal value. The consumer might consider insurance affordable if the cost of the item is low compared to what it covers.
While the individual will use the same factors to determine affordability as the insurer, the individual will interpret the risk analysis differently. The insurer may view the peril/hazard as an extremely likely event. However, the consumer will see it as unlikely. When you are young, it is human nature to assume bad things will happen to others.
Most people don’t view insurance as a top priority because of their basic assumption of invincibility. Some people don’t view insurance as a necessity. Many people only want insurance because they are required by law or creditors.
A person who is barely making a living will usually not consider insurance a necessity. A monthly premium for insurance won’t be necessary for someone like that. Because money is very scarce, other expenses will be prioritized. In this scenario, many people would consider insurance useless since they have nothing to lose.
These people, however, are the most in need of insurance. These people would be in the most financial trouble if anything happened. They could not afford to replace all of their belongings at once, and they couldn’t afford legal fees or compensation if another person was injured or died. They couldn’t replace their belongings if they were damaged.
If insurance is not a priority, the consumer will view insurance at any cost as unaffordable. Low-income consumers will most likely never consider insurance affordable. Consumers want the same thing, regardless of whether they purchase insurance by force or voluntarily. All consumers want high quality coverage at low prices regardless of the risk involved. Unfortunately, private insurers won’t be able meet this demand without incurring a significant deficit or going bankrupt from paying claims after a major disaster.
